Annuities are fairly straightforward products as far as taxation is concerned. To the extent that a distribution is considered a return of your investment in the contract, no income tax is due; to the extent that a distribution is considered earnings, income tax is due (ordinary, not capital gains). In addition, a distribution taken before age 59½ is subject to a 10 percent early withdrawal penalty tax on the earnings.

However, there are several ways to trigger an unexpected taxable event. Such an event can happen when you transfer the ownership of an annuity, or if your corporation purchases an annuity. You should also be aware of the rules regarding the taxation of annuity payments made to your beneficiaries.

Gifts of Annuity Contracts

If you own an annuity and give it to another individual as a gift, special income tax rules apply. You (the donor) are considered to have surrendered the contract and are subject to tax on the difference between the value of the contract (the cash surrender value) and the amount you have invested in the contract. So, if you’ve made a $70,000 investment in the contract, and the contract is worth $100,000 at the time of the gift, you would be subject to income tax on $30,000 (you would also be subject to regular gift tax rules on the entire $100,000 gift). Note that there is no taxable liability to the person who receives the annuity.

Non-Natural Persons

The non-natural person rule applies to deferred annuity contracts owned by corporations, trusts, and other entities.

The rule provides that if a nonhuman entity owns an annuity contract, the buildup in the contract is taxable each year to the owner, thus defeating the tax benefits of annuity ownership.

The rule has many exceptions, though, and does not apply to many common situations. For example, it does not apply where the estate of a deceased annuity owner owns the annuity. It also does not apply when an IRA or a qualified retirement plan owns the annuity contract.

In addition, there is an exception when a non-natural entity owns an annuity contract as agent for a natural person. This rule has been applied to annuity ownership by the trustees of trusts for the benefit of individuals.

Clearly, a tax professional should be consulted before putting any annuity into a trust.

Beneficiaries and Taxes

Payment after annuitization: In cases where the annuitant dies while receiving benefits under a term-certain annuity payout (i.e., payments continue for a given period of time even after the annuitant dies), the remaining payments are made to the beneficiary. The beneficiary is subject to the same tax rules as was the annuitant. A portion of each payment is considered a return of your investment in the contract, for which no income tax is due; and a portion of each payment is considered earnings, for which ordinary (not capital gains) income tax is due.

Payments before annuitization: In cases where the annuitant dies before annuitization (i.e., during the accumulation phase), any gain in the contract is recognized, and taxes are due on that amount. If the owner and the annuitant are the same, the estate of the owner will owe ordinary income taxes on the gain, and the annuity value will be included in the estate. The estate will be entitled to a tax deduction on the decedent’s final income tax return for the additional estate tax (if any) attributable to the annuity value on the decedent’s estate tax return.

If the annuity proceeds are paid to a named beneficiary, the tax on the gain in the contract is transferred to the beneficiary. The beneficiary will be entitled to a tax deduction on the beneficiary’s current income tax return for the additional estate tax (if any) attributable to the annuity value on the decedent’s estate tax return.

Source: Broadridge Investor Communication Solutions, Inc.

An annuity is a contract between you, the purchaser or owner, and an insurance company, the annuity issuer. In its simplest form, you pay money to an annuity issuer, and the issuer pays out the principal and earnings back to you or to a named beneficiary. Life insurance companies first developed annuities to provide income to individuals during their retirement years.

Annuities are either qualified or nonqualified. Qualified annuities are used in connection with tax-advantaged retirement plans, such as 401(k) plans, Section 403(b) retirement plans (TSAs), or IRAs. Qualified annuities are subject to the contribution, withdrawal, and tax rules that apply to tax-advantaged retirement plans. One of the attractive aspects of a nonqualified annuity is that its earnings are tax deferred until you begin to receive payments back from the annuity issuer. In this respect, an annuity is similar to a qualified retirement plan. Over a long period of time, your investment in an annuity can grow substantially larger than if you had invested money in a comparable taxable investment. Like a qualified retirement plan, a 10 percent tax penalty on the taxable portion of the distribution may be imposed if you begin withdrawals from an annuity before age 59½. Unlike a qualified retirement plan, contributions to a nonqualified annuity are not tax deductible, and taxes are paid only on the earnings when distributed.

Four Parties to an Annuity Contract

There are four parties to an annuity contract: the annuity issuer, the owner, the annuitant, and the beneficiary. The annuity issuer is the company (e.g., an insurance company) that issues the annuity. The owner is the individual or other entity who buys the annuity from the annuity issuer and makes the contributions to the annuity. The annuitant is the individual whose life will be used as the measuring life for determining the timing and amount of distribution benefits that will be paid out. The owner and the annuitant are usually the same person but do not have to be. Finally, the beneficiary is the person who receives a death benefit from the annuity at the death of the annuitant.

Two Distinct Phases to an Annuity

There are two distinct phases to an annuity: (1) the accumulation (or investment) phase and (2) the distribution phase.

The accumulation (or investment) phase is the time period when you add money to the annuity. When using this option, you’ll have purchased a deferred annuity. You can purchase the annuity in one lump sum (known as a single premium annuity), or you make investments periodically, over time.

The distribution phase is when you begin receiving distributions from the annuity. You have two general options for receiving distributions from your annuity. Under the first option, you can withdraw some or all of the money in the annuity in lump sums.

The second option (commonly referred to as the guaranteed income or annuitization option) provides you with a guaranteed income stream from the annuity for your entire lifetime (no matter how long you live) or for a specific period of time (e.g., ten years). (Guarantees are based on the claims-paying ability of the issuing insurance company.) This option generally can be elected several years after you purchased your deferred annuity. Or, if you want to invest in an annuity and start receiving payments within the first year, you’ll purchase what is known as an immediate annuity.

You can also elect to receive the annuity payments over both your lifetime and the lifetime of another person. This option is known as a joint and survivor annuity. Under a joint and survivor annuity, the annuity issuer promises to pay you an amount of money on a periodic basis (e.g., monthly, quarterly, or yearly). The amount you receive for each payment period will depend on how much money you have in the annuity, how earnings are credited to your account (whether fixed or variable), and the age at which you begin the annuitization phase. The length of the distribution period will also affect how much you receive.

When Is an Annuity Appropriate?

It is important to understand that annuities can be an excellent tool if you use them properly. Annuities are not right for everyone.

Nonqualified annuity contributions are not tax deductible. That’s why most experts advise funding other retirement plans first. However, if you have already contributed the maximum allowable amount to other available retirement plans, an annuity can be an excellent choice. There is no limit to how much you can invest in a nonqualified annuity, and like other qualified retirement plans, the funds are allowed to grow tax deferred until you begin taking distributions.

Annuities are designed to be long-term investment vehicles. In most cases, you’ll pay a penalty for early withdrawals. And if you take a lump-sum distribution of your annuity funds within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. As long as you’re sure you won’t need the money until at least age 59½, an annuity is worth considering. If your needs are more short term, you should explore other options.

Source: Broadridge Investor Communication Solutions, Inc.

529 plans are tax-advantaged education savings vehicles and one of the most popular ways to save for education today. Much like the way 401(k) plans revolutionized the world of retirement savings a few decades ago, 529 plans have changed the world of education savings.

An Overview of 529 Plans

Congress created 529 plans in 1996 in a piece of legislation that had little to do with college—the Small Business Job Protection Act. Known officially as qualified tuition programs, or QTPs, under federal law, 529 plans get their more common name from section 529 of the Internal Revenue Code, which governs their existence. Over the years, 529 plans have been modified by various pieces of legislation.

529 plans are governed by federal law but run by states through designated financial institutions who manage and administer specific plans. There are actually two types of 529 plans—savings plans and prepaid tuition plans. The tax advantages of each are the same, but the account features are very different. 529 savings plans are far more common.

529 Savings Plans

A 529 savings plan is an individual investment account, similar to a 401(k) plan, where you contribute money for college or K-12 tuition. To open an account, you fill out an application, where you choose a beneficiary and select one or more of the plan’s investment options. Then you simply decide when, and how much, to contribute.

529 savings plans offer a unique combination of features that no other education savings vehicle can match:

529 Prepaid Tuition Plans

A 529 prepaid tuition plan lets you save money for college, too. But it works quite differently than a 529 savings plan. Prepaid tuition plans are generally sponsored by states on behalf of in-state public colleges and, less commonly, by private colleges. For state-sponsored prepaid tuition plans, you are limited to the plan offered by your state. Only a handful of states offer prepaid tuition plans.

A prepaid tuition plan lets you prepay tuition expenses now at participating colleges, typically in-state public colleges, for use in the future. The plan’s money manager pools your contributions with those from other investors into one general fund. The fund assets are then invested to meet the plan’s future obligations. Some plans may guarantee you a minimum rate of return; others may not. At a minimum, the plan hopes to earn an annual return at least equal to the annual rate of college inflation for the most expensive college in the plan.

The most common type of prepaid tuition plan is a contract plan. With a contract plan, in exchange for your up-front cash payment (or series of payments), the plan promises to cover a predetermined amount of future tuition costs at a particular college in the plan. For example, if your up-front cash payment buys you three years’ worth of tuition at College ABC today, the plan might promise to cover two and a half years of tuition in the future. Plans have different criteria for determining how much they’ll pay out in the future. And if your beneficiary attends a school that isn’t in the prepaid plan, you’ll typically receive a lesser amount according to a predetermined formula.

The other type of prepaid tuition plan is a unit plan. With a unit plan, you purchase units or credits that represent a percentage (typically 1 percent) of the average yearly tuition costs at the plan’s participating colleges. Instead of having a predetermined value, these units or credits fluctuate in value each year according to the average tuition increases for that year. You then redeem your units or credits in the future to pay tuition costs; many plans also let you use them for room and board, books, and other supplies.

Note: It’s important to understand what will happen if your prepaid plan’s investment returns don’t keep pace with tuition increases at the colleges participating in the plan. Will your tuition guarantee be in jeopardy? Will your future purchases be limited or more expensive?

What Are the Drawbacks of 529 Plans?

Here are some drawbacks of 529 plans:

Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10 percent federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

Source: Broadridge Investor Communication Solutions, Inc.

When President George W. Bush signed the Pension Protection Act of 2006 (PPA) into law, its primary intent was to shore up the U.S. pension system by making defined benefit plan sponsors more accountable for plan funding. However, PPA also included a number of other changes that ushered in a new framework for defined contribution plans and participants.

Prior to PPA’s passage, requiring workers to make proactive choices about enrolling in their employer’s retirement plan was the norm. It was also normal to require them to make their own investment decisions. While plan features such as automatic enrollment and automatic contribution increases existed prior to enactment of PPA, plan sponsors were mostly hesitant to use them.

PPA created a path to plan sponsor safe harbor for these features. It also created the qualified default investment alternative (QDIA), which allowed plan sponsors to invest participants in risk- and age-based investment options, like target-date funds, when they do not make their own choices. Previously, plan sponsors primarily defaulted participants who didn’t make investment elections into stable value or money market funds.

“PPA was seen as a triumph of behavioral finance that would harness workers’ inertia to both get them into defined contribution plans and get them invested appropriately for the long term,” says CAPTRUST Defined Contribution Practice Leader Jennifer Doss. “Combined with automatic contribution increases, this new framework put many Americans on a path toward retirement security.”

The Rise of Target-Date Funds

While target-date funds had been around—and had been on plan investment menus—for more than a decade at that point, they had not yet caught fire. PPA—specifically, the legitimization of automatic enrollment and creation of the QDIA—provided a boost that drove mainstream adoption. These age-based asset allocation funds quickly became the QDIA of choice for many plans as PPA’s requirements went into effect.

At the time, the nascent target-date fund market was dominated by five providers—Wells Fargo/BGI, Fidelity, T. Rowe Price, Vanguard, and Principal. But it didn’t take long for other asset managers to jump into the fray, kicking off a burst of innovation, as they sought to differentiate themselves in a rapidly crowding market.

Some asset managers differentiated via the use of active, passive, or a combination of underlying funds, volatility management tools, or addition of diversifying asset classes. Some differentiated via their glidepaths—their changing asset allocations over time—sparking a debate about the superiority of to- versus through-retirement funds. Still others developed collective investment trust (CIT) products and custom target-date programs.

Today, the Plan Sponsor Council of America’s 64th Annual Survey of Profit Sharing and 401(k) Plans reports that 85 percent of plans have a QDIA, and more than 86 percent of plans that have a QDIA use target-date funds as their default investment option.

Further, according to the same survey, among plans that offer target-date funds, 50.5 percent of plans use actively managed target-date funds, 34.4 percent use passively managed, and 15.3 percent are a mix of the two. More than 40 percent of plans are using target-date funds made up of non-proprietary funds (funds not managed by their recordkeepers), 30.6 percent are using a mix of proprietary and non-proprietary funds, and 29 percent are using proprietary funds. About an even split, depending on plan size. In all, target-date funds represent almost 31 percent of plan assets.

“The initial post-PPA exuberance about target-date funds has certainly cooled in recent years,” says Scott Matheson, managing director and head of CAPTRUST’s Institutional Group. “The market seems to have achieved something of a steady state, with significant assets flowing into target-date funds, despite a slowdown in innovation.”

A few nuggets from Morningstar’s 2022 “Target-Date Strategy Landscape”:

Target-Date Downsides

This data paints a rosy picture of target-date funds, and to be fair, overall, they are a good vehicle for those participants with less complicated financial situations. They do, however, have their drawbacks.

“Target-date funds are designed as standalone one-size-fits all investments; they assume that everyone of the same age has the same financial situation and risk tolerance,” says Doss.

In other words, a fund with a target date of 2035 is geared to a 52-year-old investor planning to retire in or near 2035. They assume that the investment needs of all 52-year-olds are the same when, in fact, some may have above or below average incomes, significant (or nonexistent) savings, or different risk tolerances.

Target-date funds typically use proprietary funds selected by the funds’ manager, which the plan sponsor has no control over. There is no opportunity to determine what asset classes are included or align the underlying managers with the plan’s core menu. This means that you may end up with some subpar funds in your plan and there’s not much you can do about it.

Lastly, some target-date fund providers do not manage their asset allocations after retirement age and, instead, maintain a static asset allocation from age 65 and up. This ignores the participant challenges of managing a retirement portfolio during retirement drawdown or decumulation.

What Next?

While target date innovation may have slowed down, interesting things are happening elsewhere in the world of QDIAs. Specifically, the rise of cost-effective, flexible managed account programs has the potential to disrupt the target date oligopoly and replace a good and convenient QDIA option with something much better in the coming years.

Managed accounts have, of course, been around for some time, available from the likes of Edelman Financial Engines, Morningstar, and others. According to Vanguard’s “How America Saves 2021” report, nearly 40 percent of all plans offered managed account advice in 2020, and more than seven in 10 larger plans offered the service. However, only 10 percent of plan participants take advantage of the offering.

There are two main reasons behind this meager uptake. First, “typically, managed account programs are bolted onto a plan and simply made available to participants,” says Matheson. “They are not widely promoted, nor understood.”

More importantly, despite their ability to be used as QDIA, only 3.7 percent of plans use them for that purpose despite, arguably, being a better product.

What’s the disconnect? “Many plan sponsors’ impressions of managed accounts are rooted in the past and don’t consider the current state of the art,” says Doss. Given plan sponsor inertia and the work involved in changing a plan’s default investment option, they may not seem so exciting. But managed accounts have been on their own evolutionary journey over the past two decades, and, over that time, they have become much more appealing—and worthy of consideration as a QDIA.

The first thing to note is that the next generation of QDIA is likely to be a hybrid of target-date funds for younger participants and managed accounts for older participants.

“The rationale being that younger people’s asset allocation should be more aggressive; they’ve got lots of time and human capital at that stage of their lives,” says Doss. From their 20s into the mid- to late 40s, a target-date fund may be perfectly appropriate for them.”

However, as they age, participants’ financial circumstances start to diverge. That’s when the managed account kicks in. Instead of using only age—or time until retirement—to drive asset allocation, the managed account can use a dozen or more data points to create much more personalized advice and portfolios. Data points such as salary, account balance, pension or other plan savings, savings rate, and sponsor match provide the basis for a much more personalized portfolio and are easily accessed via recordkeeping systems.

“That means that even defaulted and disengaged participants can receive personalized advice,” says Doss.

This personalized portfolio can take them the last leg of their journey to retirement and beyond. Along the way, they can engage by adding further information about their financial situation, such as outside assets, actual retirement age, expected income needs, and Social Security filing dates, for even more tailored advice that includes how to take withdrawals to fund their expenses on top of asset allocation.

“Even if they don’t engage, older participants will receive a much more bespoke experience,” says Matheson. And that’s important in today’s tight labor market. Employees are looking for something extra from their employers.”

“What’s nice about this hybrid QDIA approach, as we call it, is that it doesn’t require revolutionary change,” says Doss. “All the necessary parts are available and already in place for many plans. It’s really just a reframe of how they are being used.”

Of course, other due diligence boxes must be checked. The cost of the program from the early target-date fund years into retirement must be reasonable given the services provided along the way. Plan sponsors will want to understand the underlying investment methodologies—as they would when picking a target-date fund series.

They will also need to monitor the program over time, which will require a mindset shift from traditional investment benchmarks to an outcome orientation that focuses on retirement readiness.

“Longer term, this hybrid approach lays the tracks for further innovation that could, for example, include incorporating retirement income strategies or guaranteed income products like in-plan annuities,” says Doss. With more participants keeping their money in plans after they retire, services like this may become increasingly desirable.

While the jury is out on whether PPA had its desired effect on pension plans, the changes it brought to defined contribution plans have been game changing in several ways—higher participation, higher balances, and better investment options for defaulted participants. As importantly, it kicked off more than a decade of innovation that creates a lot of possibilities for plan sponsors. For many, it might be time to reassess their QDIA to see if the time is right for what’s next.

Looking for a way to set your teenagers up for financial success down the road? Get them off to a good—and early—start by opening Roth individual retirement accounts (IRAs) for them as soon as they start working. Put the power of time and compounding to work on their behalf. You’ll be surprised at the result.

Mike Gray is a dad who thinks ahead. Far ahead. When his son and daughter were teenagers, he set up wonderful tax-free gifts for them to help secure their financial futures.

When his kids got their first jobs, he opened Roth IRAs for them. Gray, a financial advisor in CAPTRUST’s Raleigh headquarters office, put in an amount matching their modest earnings. He continued contributing to those accounts for years.

Retirement accounts for teens? It may sound premature until you consider that the golden rule of retirement savings is to start early so the savings have more time to grow. Financial advisors often point out that 20-somethings who start saving a little each month gain a big-time advantage over those who wait till their 30s or 40s to get started.

By the same reasoning, why not help your child reap the benefits of an extra-long investment time horizon of 50 years or more? A Roth IRA, funded with after-tax dollars and that grows tax-free, is well-suited to help with this goal.

Eligible with a First Job

Just like adults, kids of any age are permitted to contribute to Roth IRAs as long as they have wages or compensation within Internal Revenue Service limits. In 2022, the maximum contribution is $6,000 or the amount earned, whichever is less.

Minors need a parent, grandparent, or other adult to open custodial Roth IRAs in their names. And it’s fine for an adult to make the contributions on the child’s behalf.

Gray’s daughter got her first real job at a summer camp at about age 14. She earned less than $2,000 that year, he recalls. She was allowed to keep her paychecks and spend the money as she liked. Gray opened the Roth IRA in her name and made a contribution in the amount she earned. Every year she had a job, he matched the amount. “I’ve made contributions for eight or nine years now, in whatever amount her earnings were,” says Gray. “She has a real job now, as a nurse, so I put in the full Roth amount each year.”

When his son turned 15 and got a job as a lifeguard, Gray opened a Roth IRA for him, too.

His kids are in their 20s now, and he hasn’t told them yet.

Lots of Time for Investments to Grow

Here’s why an early start is a gift in itself. Say you gave your 25-year-old child $5,500 to invest. After thirty years, the money would grow to $41,867, assuming 7 percent growth, compounded monthly.

But you could double the impact of your gift by giving it to your child at age 15. After forty years, assuming the same rate of return, the $5,500 would grow to $82,360.

Consider what would happen if your 25-year-old child funded a Roth IRA for 10 years, then stopped making contributions. After 30 years, the account would be worth $314,643 (assuming equal monthly contributions adding up to $5,500 a year and a 7 percent annual return, compounded monthly).

What if you helped your child make the same investment a decade earlier, at age 15? The difference would be huge. After 40 years, at the same rate of return, the sum would grow to $618,951.

“Getting started that early is really powerful as far as the value of compound growth. It’s pretty amazing the effect of another 10 years,” says Gray.

Kid-Friendly Tax Rates

Roth IRA rules are great for young people. Kids generally pay little or no taxes, so it makes sense to use after-tax dollars in a Roth rather than tax-deferred dollars in a traditional IRA. Decades down the line, all withdrawals from the Roth IRA after age 59 1/2 will be completely tax-free, barring a change to Roth IRA tax treatment.

Non-Retirement Uses of Roth IRA Funds

Roth IRAs work best if the money is left to grow undisturbed until retirement. However, the rules are flexible enough to allow funds to be tapped under some circumstances.

Contributions have already been taxed, so they can be withdrawn at any time.

Earnings, or investment returns, are treated differently. Prior to age 59½, early distributions of earnings are generally subject to income tax, a 10 percent penalty, or both—with some important exceptions:

Gray plans to reveal his children’s Roth IRAs to them one day, though he hasn’t decided when. It might be when the balances reach a nice, round number, like $50,000, or some kind of special occasion. “Marriage might be something that triggers it. It’s a gift, but it comes with caveats,” he says. The big news will come with a serious discussion about using the money wisely.

For now, those gifts that date back to their summer camp and lifeguarding years continue to grow, tax-free.

Even with the obstacles of the past few years, charitable giving is on the rise. In fact, The National Philanthropic Trust says that 86 percent of affluent households maintained or increased their giving in 2020, despite uncertainty about further spread of COVID-19. Charitable donations are up 5.1 percent overall, according to Giving USA. But we’re not just talking about simple cash donations. 

When it comes to giving, Eric Bailey, head of endowments and foundations at CAPTRUST, says he sees a focus on tax-efficient methods of giving. There are several ways to support a nonprofit and reap the tax benefits. “We’re initiating creative tactics with our wealth management clients who are thinking about a cash contribution,” Bailey says. “We’ll go through different scenarios to help the donor understand other ways to give, rather than just writing a check.”  

Donating Appreciated Securities  

Donating appreciated securities—stocks or bonds that have increased in value since purchase—can provide major benefits to both the donor and the nonprofit. “Gifting shares of a stock can be more efficient than writing a check,” Bailey says, “because the donated stock is typically free of capital gains taxes.” This could mean savings of tens of thousands of dollars of capital gains taxes, depending on the stock’s value, and could help maximize the value of your gift.   
 
For example, a stock with a current value of $50,000—originally purchased for $8,000—could result in $12,000 in capital gains taxes when sold (assuming a 28% tax rate), leaving only $38,000 for the nonprofit. But when the stock is donated instead of sold, capital gains tax is avoided on the gift, allowing the full $50,000 to help the nonprofit fulfill its mission.  

Donating appreciated securities can result in giving more money to the organizations you care about.   

Donor-Advised Funds 

When you donate money to a donor-advised fund (DAF), the funds are set aside in a 501(c)(3) account with a third party. The money is then available to distribute at your discretion to your charities of choice. The National Philanthropic Trust’s 2021 Donor-Advised Fund report notes that the number of DAFs has increased 36.4 percent from 2016 to 2020.  

“A donor-advised fund is a qualifying charity, so you can immediately take that deduction before it’s distributed,” says Steve Morton, principal and financial advisor at CAPTRUST. Relocating assets like appreciated securities, property, or cash into a donor-advised fund—depending on the amount donated—may allow you to itemize deductions, which may lower your tax bill.  

With a DAF you can be more strategic by considering the timing of your donations to maximize your itemized deductions. Bunching charitable donations into a single year could provide an itemized deduction when you need it most. Then, the money is there to distribute on your time and at your discretion. “I find it easier to give from a donor-advised fund, because you don’t think about it as your money anymore,” says Bailey. 

Moving money into a DAF lets you take a charitable tax deduction of the donation’s full market value. It’s important to note that the amount of your donation’s deduction is based on your adjusted gross income (AGI), and any unused deduction can be carried up to five additional years.  

Donor-advised funds can be especially helpful for clients nearing retirement. “It could be beneficial to put assets into a DAF and take the tax deduction when you are at your highest earning potential,” says Morton, “typically when someone is close to retirement.” 

Morton says many of his clients like to make anonymous gifts. “With a donor-advised fund, the gift is acknowledged directly to the third party that holds the account. It’s much easier to make an anonymous gift that way.” 

Qualified Charitable Distribution

Over 72 years old? If so, you must make annual withdrawals, known as required minimum distributions (RMDs), from your individual retirement account (IRA). Using your RMDs to fund qualified charitable distributions (QCDs) to your favorite charities is a tax-friendly method of giving, eliminating the income tax while simultaneously satisfying some or all of your yearly RMD. 

“Retirees typically don’t have a lot of itemized deductions. The standard deduction is so high that most can’t deduct their charitable donations,” says Morton. Instead of a traditional charitable deduction, you can utilize QCDs in your tax-saving strategy.   

“Many clients aren’t ready at 72 to take their required distributions from their IRAs and don’t want to pay taxes on them. QCDs are an easy solution and something to consider.” 

Keep in mind that the 2022 maximum donation from your RMD is $100,000 per person, and the gift must come directly from the IRA to the charity.  

Charitable Remainder Trust

Funding a charitable remainder trust (CRT) is another option for tax-efficient giving. Assets gifted into a CRT create income for you and your beneficiaries. Plus, the leftover is eventually donated to one or more nonprofits that you support. Income from the CRT and the ultimate gift to the charity can appreciate based on how the assets are invested within the CRT. 

“A charitable remainder trust is a great strategy for appreciated assets,” Morton says, because you receive a partial tax deduction based on the assets gifted into the CRT, depending on a number of factors. 

The assets remaining in the CRT must go to a qualifying nonprofit after the income distribution term ends. This time period can cover either the lifetime of the beneficiaries or up to 20 years. 

“Designating a charity as a beneficiary through a CRT is a perfect way to give back,” says Morton. “There are tax benefits for you now, and down the road a charity gets money as well. It’s a win-win.” 

 Everyone’s situation is different, so consult your tax and financial advisors for the best option for your charitable giving. Have a nonprofit in mind that you want to support? Talk with their team about their preferred way to receive a donation.  

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It’s important to understand your options.

What Will I Be Entitled to?

If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pre-tax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100 percent vested in your employer’s contributions after three years of service (cliff vesting), or you must vest gradually, 20 percent per year until you’re fully vested after six years (graded vesting). Plans can have faster vesting schedules, and some even have 100 percent immediate vesting. You’ll also be 100 percent vested once you’ve reached your plan’s normal retirement age.

It’s important for you to understand how your particular plan’s vesting schedule works, because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t Spend It

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10 percent penalty may apply to the taxable portion of your payout. (Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can leave your money in your employer’s plan at least until you reach the plan’s normal retirement age (typically age 65). But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a 60-day rollover, where you get the check and then roll the money over yourself, because your employer has to withhold 20 percent of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20 percent that’s been withheld until you recapture that amount when you file your income tax return.

Should I Roll Over to My New Employer’s 401(k) Plan or to an IRA?

Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences—both now and in the future.

Reasons to consider rolling over to an IRA:

Reasons to consider rolling over to your new employer’s 401(k) plan (or stay in your current plan):

When evaluating whether to initiate a rollover always be sure to ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose; compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any); and understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What about Outstanding Plan Loans?

In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

In some cases, you have no choice—you need to use the funds. If so, try to minimize the tax impact. For example, if you have nontaxable after-tax contributions in your account, keep in mind that you can roll over just the taxable portion of your distribution and keep the nontaxable portion for yourself.

1 If you reached age 72 before July 1, 2021, you will need to take an RMD by December 31, 2021.

Source: Broadridge Investor Communication Solutions, Inc.

How does Social Security work?

The Social Security system is based on a simple premise: Throughout your career, you pay a portion of your earnings into a trust fund by paying Social Security or self-employment taxes. Your employer, if any, contributes an equal amount. In return, you receive certain benefits that can provide income to you when you need it most–at retirement or when you become disabled, for instance. Your family members can receive benefits based on your earnings record, too. The amount of benefits that you and your family members receive depends on several factors, including your average lifetime earnings, your date of birth, and the type of benefit that you’re applying for.

Your earnings and the taxes you pay are reported to the Social Security Administration (SSA) by your employer, or if you are self-employed, by the Internal Revenue Service (IRS). The SSA uses your Social Security number to track your earnings and your benefits.

You can find out more about future Social Security benefits by signing up for a my Social Security account at the Social Security website, ssa.gov, so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If you’re not registered for an online account and are not yet receiving benefits, you’ll receive a statement in the mail every year, starting at age 60. You can also use the Retirement Estimator calculator on the Social Security website, as well as other benefit calculators that can help you estimate disability and survivor benefits.

Social Security Eligibility

When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you have. Most people must build up 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but need fewer credits to be eligible for disability benefits or for their family members to be eligible for survivor benefits.

Your Retirement Benefits

Your Social Security retirement benefit is based on your average earnings over your working career. Your age at the time you start receiving Social Security retirement benefits also affects your benefit amount. If you were born between 1943 and 1954, your full retirement age is 66. Full retirement age increases in two-month increments thereafter, until it reaches age 67 for anyone born in 1960 or later.

But you don’t have to wait until full retirement age to begin receiving benefits. No matter what your full retirement age, you can begin receiving early retirement benefits at age 62. Doing so is sometimes advantageous. Although you’ll receive a reduced benefit if you retire early, you’ll receive benefits for a longer period than someone who retires at full retirement age.

You can also choose to delay receiving retirement benefits past full retirement age. If you delay retirement, the Social Security benefit that you eventually receive will be as much as 8 percent higher for each year you wait. That’s because you’ll receive a delayed retirement credit for each month that you delay receiving retirement benefits, up to age 70.

Disability Benefits

If you become disabled, you may be eligible for Social Security disability benefits. The SSA defines disability as a physical or mental condition severe enough to prevent a person from performing substantial work of any kind for at least a year. This is a strict definition of disability, so if you’re only temporarily disabled, don’t expect to receive Social Security disability benefits–benefits won’t begin until the sixth full month after the onset of your disability. And because processing your claim may take some time, apply for disability benefits as soon as you realize that your disability will be long term.

Family Benefits

If you begin receiving retirement or disability benefits, your family members might also be eligible to receive benefits based on your earnings record. Eligible family members may include:

Each family member may receive a benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately. Your benefit won’t be affected.

Survivor Benefits

When you die, your family members may qualify for survivor benefits based on your earnings record. These family members include:

Your widow(er) or children may also receive a one-time $255 death benefit immediately after you die.

Applying for Social Security Benefits

The SSA recommends apply for benefits online at the SSA website, but you can also apply by calling 800.772.1213 or by making an appointment at your local SSA office. The SSA suggests that you apply for benefits three months before you want your benefits to start. If you’re applying for disability or survivor benefits, apply as soon as you are eligible.

Depending on the type of Social Security benefits that you are applying for, you will be asked to furnish certain records, such as a birth certificate, W-2 forms, and verification of your Social Security number and citizenship. The documents must be original or certified copies. If any of your family members are applying for benefits, they will be expected to submit similar documentation. The SSA representative will let you know which documents you need and help you get any documents you don’t already have.

1.Fast Facts & Figures About Social Security, 2021

Source: Broadridge Investor Communication Solutions, Inc.

Lesson 1: Learning to Handle an Allowance

An allowance is often a child’s first brush with financial independence. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants.

It’s up to you to decide how much to give your child based on your values and family budget, but a rule of thumb used by many parents is to give a child 50 cents or 1 dollar for every year of age. To come up with the right amount, you might also want to consider what your child will need to pay for out of his or her allowance, and how much of it will go into savings.

Some parents ask their child to earn an allowance by doing chores around the house, while others give their child an allowance with no strings attached. If you’re not sure which approach is better, you might want to compromise. Pay your child a small allowance, and then give him or her the chance to earn extra money by doing chores that fall outside of his or her normal household responsibilities.

If you decide to give your child an allowance, here are some things to keep in mind:

Lesson 2: Opening a Bank Account

Taking your child to your local bank or credit union to open an account (or opening an account online) is a simple way to introduce the concept of saving money. Your child will learn how savings accounts work, and will soon enjoy making deposits.

Many banks and credit unions have programs that provide activities and incentives designed to help children learn financial basics. Here are some other ways you can help your child develop good savings habits:

Lesson 3: Setting and Saving for Financial Goals

When your children get money from relatives, you want them to save it for college, but they’d rather spend it now. Let’s face it: children don’t always see the value of putting money away for the future. So how can you get your child excited about setting and saving for financial goals? Here are a few ideas:

Finally, don’t expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.

Lesson 4: Becoming a Smart Consumer

Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren’t born with the ability to spend it wisely. Your child needs guidance from you to make good buying decisions. Here are a few things you can do to help your child become a smart consumer:

Source: Broadridge Investor Communication Solutions, Inc.

When you die, you leave behind your estate. Your estate consists of your assets—all of your money, real estate, and worldly belongings. Your estate also includes your debts, expenses, and unpaid taxes. After you die, somebody must take charge of your estate and settle your affairs. This person will take your estate through probate, a court-supervised process that winds up your financial affairs after your death. The proceedings take place in the state where you were living at the time of your death. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate.

How Does Probate Start?

If your estate is subject to probate, someone (usually a family member) begins the process by filing an application for the probate of your will. The application is known as a petition. The petitioner brings it to the probate court along with your will. Usually, the petitioner will file an application for the appointment of an executor at the same time. The court first rules on the validity of the will. Assuming that the will meets all of your state’s legal requirements, the court will then rule on the application for an executor. If the executor meets your state’s requirements and is otherwise fit to serve, the court generally approves the application.

What’s an Executor?

The executor is the person whom you choose to handle the settlement of your estate. Typically, the executor is a spouse or a close family member, but you may want to name a professional executor, such as a bank or attorney. You’ll want to choose someone whom you trust will be able to carry out your wishes as stated in the will. The executor has a fiduciary duty—that is, a heightened responsibility to be honest, impartial, and financially responsible. Now, this doesn’t mean that your executor has to be an attorney or tax wizard, but merely has the common sense to know when to ask for specialized advice.

Your executor’s duties may include:

The probate court supervises and oversees the entire process. Some states allow a less formal process if the estate is small and there are no complicated issues to resolve. In those states allowing informal probate, the court may be involved only indirectly. This may speed up the probate process, which can take years.

What If You Don’t Name an Executor?

If you don’t name an executor in your will, or if the executor can’t serve for some reason, the court will appoint an administrator to settle your estate according to the terms of your will. If you die without a will, the court will also appoint an administrator to settle your estate. This administrator will follow a special set of laws, known as intestacy laws, that are made for such situations.

Is All of Your Property Subject to Probate?

Although most assets in your estate may pass through the probate process, other assets may not. It often depends on the type of asset or how an asset is titled. For example, many married couples own their residence jointly with rights of survivorship. Property owned in this manner bypasses probate entirely and passes by operation of law. That is, at death, the property passes directly to the joint owner regardless of the terms of the will and without going through probate. Other assets that may bypass probate include:

Source: Broadridge Investor Communication Solutions, Inc.